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Bunzl – margins improve, big acquisition announced

Bunzl reported a 1.9% drop in full-year revenue to £11.8bn, when ignoring exchange rates. Growth from acquisitions was offset by lower volumes and normalising COVID-19-related sales.

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Underlying operating profit rose 6.2% to £944mn, as margins rose to a record 8.0% off the back of acquisitions and increased sales of own-brand products.

There were 19 acquisitions in 2023, with a committed spend of £468mn. Alongside results, two more acquisitions were announced, the largest being an 80% stake in Nisbets for £339mn.

Free cash flow fell 8.8% to £644mn. Net debt including lease liabilities was broadly flat at £1.75bn. A final dividend of 50.1p was announced, up 10.4%.

Despite a slower start in North America, guidance for 2024 remains. Revenue is expected to post a small gain driven by acquisitions and operating margin is expected to be slightly lower.

The shares fell 4.9% in early trading.

Our view

A decent set of full-year results were slightly hindered by commentary that trading in the early parts of the new year has been worse than expected. But we were pleased to see full-year guidance remains intact despite this.

Bunzl's a mashup of around 150 distribution businesses, which source and deliver a range of essential products. There's nothing fancy about the products on offer, think food packaging and safety equipment. But that's what we like about the product range, these are things customers can't go without. Overall, we retain the view that Bunzl's an attractive business, but there are some things to monitor.

Recent organic performance has been a struggle. Falling inflation is pulling sales down and normalising sales from Covid related products across geographies are a drag. The latter should normalise as we move through 2024 and comparable periods ease, but it’s pricing where see headwinds persisting.

Aside from organic growth, it's acquisitions that take centre stage. Over the past 20 years, they’ve accounted for around two-thirds of the impressive 9% compounded annualised growth rate in revenue. It’s a highly fragmented market so there’s plenty of opportunity to snap up businesses with attractive margins at decent prices.

The Nisbet deal (a distributor of catering equipment and consumables) was bigger than we’re used to seeing. At £339mn on its own, that’s already 72% of the total spend on 19 acquisitions in 2023. Initial details point to a slight premium paid compared to the usual sweet spot, but it’s expected to be a meaningful benefit to earnings in its first full year post-completion.

Acquisition-led strategies have their drawbacks. If the pool of target companies dries up or a business needs to raise external cash to fund acquisitions, then it's not usually sustainable. Bunzl's got this covered with a highly cash generative business model, and a strong balance sheet with plenty of room to tap debt markets if needed.

We've been genuinely impressed by Bunzl's margin performance, and remain supportive of the resilient portfolio and highly cash-generative model. In the short term, we're mindful that organic weakness puts a lot of pressure on acquisitions to do the hard work. Expect to see some further top line declines before things stabilise.

Bunzl key facts

All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 26th February 2024